Resale market offers flat buyers a 25% discount in Abu Dhabi

Nathalie Gillet

  • Last Updated: July 05. 2008 10:45PM UAE / July 5. 2008 6:45PM GMT

Inflation caused by rising construction costs and demand fuelled by speculation has recently pushed launch prices rapidly ­upwards. Philip Cheung / The National

Soaring demand and inflation are pushing developers to raise prices for off-plan apartments in Abu Dhabi so fast that the primary market is outpacing the resale market for similar flats by 25 per cent, property agents say.

Secondary market prices would normally be expected to be higher than those offered by developers, as resellers take a profit.

But a unit on Al Raha Beach ­development, for example, which costs Dh2,500 (US$681) per square foot from the developer today, could be picked up on the resale market at Dh1,950 per sq ft from someone who bought earlier on the same development, LLJ Properties said.

For units launched earlier at a cheaper price – Dh850 per sq ft last year in the case of Raha Beach – the reseller can still make a good profit by selling at Dh1,950 today. Because of spiralling prices for properties bought direct from developers, buyers can save up to a quarter by going to the resale market, the agency said.

Inflation caused by rising construction costs and demand fuelled by speculation has recently pushed launch prices rapidly ­upwards.

“The gap between both markets is widening, since developers who launch their products are trying to catch up with rising construction costs,” said Malake Fontaine, a property consultant at Sherwoods.

Last year, the ratio between the two markets was the reverse: a unit on Al Raha Beach costing Dh800 per sq ft at launch in May or June of 2007 would sell on the secondary market for Dh950 – nearly 20 per cent more. This was partly because the Abu Dhabi market was starting up last year. Few properties had been launched much earlier, and inflation was not as high as it is today.

However, although the secondary market is cheaper, brokers say buyers prefer to go for the primary market’s more expensive off-plan products because payment conditions are more attractive.

Ousama Ghannoum, the marketing and media director of Aldar, a major Abu-Dhabi developer, explained that resale units came with higher down payments: “When we, as a developer, sell properties on the primary market, we only require from the buyer a down payment of 10 per cent. And then we apply a payment schedule, that is, a certain percentage each month,” he said.

 “But when a buyer wants to resell it, he will need to have paid us at least 20 per cent of the property [price] before being allowed to transfer it, and would require this sum from the next buyer, in addition to other expenses.”

So buying from the developer means paying less cash up front. “Most of the developers require 10 per cent before allowing the buyer to transfer. Others, like Sorouh, ask even up to 30 per cent,” said Susan Cronin, the general manager of the property broker, Aljar Properties, based in Abu Dhabi.

“Then a buyer on the secondary market will need to cover the transfer fee and a commission to the sales agent, which generally total four per cent,” Ms Fontaine said. “On top of that, the buyer will also pay the difference between the original price and the reselling price, or the reseller’s profit margin or ‘premium’.

“And you need to have all that in cash,” Ms Cronin said. “For example, a one-bedroom apartment in Oceanscape in Abu Dhabi that originally cost Dh1.7 million on its launching is now at Dh2.3m on the secondary market. A buyer will have to pay around Dh629,000 upfront to the reseller, instead of only 10 per cent for the same kind of product launched today.”

Ms Fontaine said buyers who could afford only 10 per cent would choose the primary market and sometimes sell before the second payment, earning a significant premium.
“This has happened very frequently in the last couple of months, though it seems that the secondary market is getting more quiet,” he said.

A banker who asked to remain anonymous said: “If someone has already paid 20 per cent for instance for a flat worth Dh300,000, that is Dh60,000, and resells it three months later at Dh360,000, he will make a Dh60,000 profit, whereas he has only invested Dh60,000 himself. “This is a 100 per cent return on investment, which is far more interesting than any other financial product today.”

Ms Cronin said reselling today at prices that matched the primary market was proving more difficult. “People who want to resell quickly on the secondary market realise that the new buyers have this predicament. On Reem Island, for instance, they are not bringing their property up to present market levels of Dh2,400 per sq ft but would sell for Dh1,800 per sq ft, or at least less than Dh2,000. It’s a strange phenomenon at the moment,” she said.